A recent study, "Why Do CFOs Become Involved in Material Accounting Manipulations," by researchers at the University of Pittsburgh and the University of Washington attempts to answer just this question. Their finding? Pressure from the companies' CEOs, more than the possibility of financial gain, tends to drive the actions of crooked CFOs.
Of course, the researchers couldn't actually divine the motivations that drove the CFOs who manipulated numbers. Instead, they reviewed a group of firms subject to SEC enforcement, analyzing the role of the CFOs, as well as the costs they incurred and any benefits they gained from their actions.
They found - not surprisingly - that the CFOs involved faced stiff penalties for their actions. More than half of the CFOs (54 percent) employed by the nearly 300 firms in the sample that were charged by the SEC for accounting manipulation were prohibited from serving as an officer, director or accountant with a public company in the future. About 48 percent of CFOs were fined as a result of their wrongdoing, with a median fine of $50,000. A small number - about 4 percent - also faced criminal charges. Clearly, monkeying with the numbers can be quite costly for CFOs.
On the other hand, the CFOs that engaged shady number crunching didn't have significantly higher equity incentives than CFOs in the control sample. That means the CFOs involved in misstatements took on a lot of risk, yet couldn't expect to come out much further ahead financially than their counterparts at law-abiding firms.
Conversely, the CEOs of firms in trouble exhibited both greater power and equity incentive than CEOs of control firms. For instance, these CEOs were more likely to be company founders and to serve as chair of their boards than the heads of the other firms. "This evidence is also consistent with the pressured CFO explanation; that material accounting manipulations are more likely in the presence of powerful CEOs," the researchers write.
What's more, CFO turnover jumped during the three years before the misstatements occurred. That suggests that at least some CFOs either left or lost their jobs because they refused to participate in the manipulation.
The SEC also seems to have taken note of the larger role that CEOs, rather than CFOs, typically played in the schemes. When the researchers examined 188 companies in which both the CFO and CEO were charged with manipulating numbers, they found that the SEC had charged 18 percent of CFOs with orchestrating the schemes. When it came to CEOs, however, 32 percent were charged - almost double the CFO number.
Moreover, when the SEC charged just the CFO with wrongdoing, 30 percent of them benefited financially. That's a lot, but it's significantly less than the 46 percent of CEOs who were charged and also gained financially.
Given these findings, are there changes that could reduce accounting shenanigans? To be sure, the research doesn't mean that CFOs who cook the books can simply blame their actions on their bosses; clearly they could have acted differently, as difficult as doing so might have been. The findings do suggest, however, that one step to reducing the opportunity for wrongdoing would be to provide CFOs with greater independence from their CEOs. One way to accomplish this would be to expect greater participation from corporate boards or audit committees when it comes to hiring and evaluating their firms' chief financial officers.